Canadian Dollar Climbs From Two-Week Low as Equities Advance

June 26 (Bloomberg) -- Canada’s dollar strengthened from
the lowest in more than two weeks versus its U.S. counterpart as
investor aversion to higher-returning assets eased.

The currency is down this month against most of its major
peers on concern European leaders meeting this week will fail to
resolve the region’s debt crisis, dimming the outlook for
countries that export commodities. Trading patterns suggest the
Canadian currency is bound in about a half-cent range, according
to Blake Jespersen at Bank of Montreal.

“Market sentiment and developments from the euro-zone
continue to be the main drivers for the Canadian dollar,” said
Mark McCormick, a currency strategist at Brown Brothers Harriman
& Co. in New York, by e-mail. “Softer U.S. and Canadian data is
also a key driver. This pushes out rate-hike expectations from
the Bank of Canada.”

Canada’s currency, nicknamed the loonie, strengthened 0.5
percent to C$1.0238 per U.S. dollar at 5 p.m. in Toronto. It
fell to C$1.0318 yesterday, the lowest since June 12. One
Canadian dollar buys 97.66 cents.

The loonie is becoming more governed by fluctuations in
crude-oil prices. The 30-day correlation coefficient between the
Canadian dollar and crude-oil futures rose to 0.82 today, the
highest level this year, from 0.60 at the end of May, Bloomberg
data show. The average over the past decade is 0.36. A
coefficient of 1 means the measures move in lockstep. The
correlation dropped as low as 0.30 in February.

The loonie’s correlation with the S&P 500 was 0.91 today,
also the highest this year.

The Canadian dollar dropped 0.4 percent in the past month,
according to Bloomberg Correlation-Weighted Indexes, while the
greenback fell 0.9 percent and the euro weakened 1.1 percent.
New Zealand’s dollar added 4.4 percent to lead gainers.

‘Somewhat Hawkish’

Bank of Canada Governor Mark Carney will lower borrowing
costs by the end of the year for the first time since 2009 as
investors increase odds that the central bank will have to react
to the prospect of a worsening global economy, swap prices show.

Investors are pricing in as many as 11 basis points of
central-bank easing by October. There’s a 29 percent chance of
one quarter-percentage point cut this year, according to
Bloomberg calculations on overnight index swaps, which were
pricing in rate increases last month.

Carney reiterated last week in a Halifax, Nova Scotia,
speech that he may raise interest rates as the economy continues
to move toward full output.

“The Bank of Canada is still somewhat hawkish, but the
policy outlook is conditional on external drivers,” said Brown
Brothers’ McCormick, who predicts the Canadian currency will
weaken to C$1.0340 versus the greenback.

Slowing growth not just in Europe, but also in the U.S.,
China and other emerging markets is depressing oil prices and
hampering the loonie, Canadian Imperial Bank of Commerce
analysts including Andrew Grantham wrote in a note to clients
today. “Prior expectations of interest rate hikes by the Bank
of Canada have largely disappeared.”

CIBC predicts the central bank will leave its overnight
rate at 1 percent until 2014, and the loonie will weaken to
C$1.04 versus the greenback by the end of September, before
returning to parity by year-end.